Testing Times in Pathology
Pathology businesses with extensive scale have attractive economics but their value is tempered by the power of a dominant payer. With tension between the Government and the listed Pathology providers set to intensify, we are watching the developments with keen interest.
By way of background, the Government is seeking to reduce growth in health care expenditure by removing a bulk billing incentive received by Pathology providers. The Pathology sector has opposed these cuts, and during reporting season we were particularly interested with how Sonic Healthcare (ASX: SHL) is weighing its options.
Sonic is launching a campaign in their ~2,000 collection centres to protest the proposed cuts. Since collection centres directly interact with patients it’s an effective medium to sway public opinion. Keep a close eye on the promotional material at these centres the next time you require a blood test – we’d love to hear your experience.
Sonic also flagged the introduction of price rises for the private sector, which is far more politically sensitive. In May 2009, the Government cut funding to the Pathology market and Sonic responded with higher charges to patients. Sonic subsequently experienced a sharp drop in volumes and reversed the billing arrangements.
With the Government wanting the Pathology companies to absorb the cuts, and the Pathology companies seeking to pass them on in the form of higher prices, this coming period will provide critical insights into the underlying economics of the industry.
Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Gav J
:
Hi Ben, yeah it will be very interesting to see how this plays out. Personally I feel that in the medium to long-term demographic factors and further increased utilisation of healthcare services like pathology (and radiology) will overwhelm any short-term concerns. Charging private fees though will almost certainly reduce volumes to some degree, in the long run though it will just result in some people deferring healthcare spending till they really need it. By that time the opportunity for prevention may have been missed eg. a person doesn’t do a screening blood test for blood sugar or cholesterol levels then later gets diagnosed with diabetes or has a heart attack. At that point their healthcare spending ramps up many-fold. I think also with SHL their is benefit in being the biggest player in the local market, as any changes affect all industry participants, which plays into the hands of the large corporate players with scale. Also the cost cutting potential should not be underestimated given the bloated collection centre network with inflated rents to medical practice owners. Further to this if you think really long-term, then the political party in power at any present time may have differing approaches and degrees of restraint to healthcare spending, so basing long-term decisions on who is in power today and their current plans doesn’t necessarily change the long-term trends and outlook. SHL’s globally diversified business also helps them as evidenced by their recent results. Some analysts point out that other country governments may in the future also introduce cuts to pathology funding in their respective countries, and I think that while this will almost certainly occur to some degree or another, it’s improbable that it will all happen in the same year or to the same extent. And whichever political party is in power at the time in these countries will again have differing approaches to reigning in healthcare spending. Christophe Rex from RHC also makes a good point when he talks about the “unchangeable demographic factors” and the baby boomer population only now moving into the high healthcare spending 70+ years.
Pierre
:
An insightful observation Ben.
Structurally, there is also the long term but not remote threat of technology change. Theranos and other pathology companies may not be a current threat, but if their technology is adopted in the way they predict over the next 5 years in the US, then current pathology as we know it, will not exist. Capital and operating expenditure spent on currently on collection points, labs and distribution infrastructure will evaporate to a significant extent. This industry is just too hard to “moat test” 5 to 10 years out.
Tristan Harrison
:
It will be very interesting to see what happens.
I’m curious as why it is mainly the customer and company who are the main losers when it’s the GP whose services are being devalued, why aren’t they being paid less? I say this because:
The public are more and more prone to self-diagnosis.
Patients are just seeing the GP as a tool to get a prescription / go to another health service.
The GP doesn’t cure the patient, normally it’s that other health service.
There is increasing home/phone/device technology doing the job of the GP.
The public and the Government both baulk at the idea of paying more for GP services.
The GP is one of the highest paid jobs out there, how can that remuneration stay so high when there’s so many negative factors? The longer it stays high, the quicker innovation will want a piece.
Carlos Cobelas
:
Tristan, your derogatory comments towards GPs has little to do with the topic of Sonic Healthcare. As for GP incomes, they are not one of the highest paid out there, compared with specialists, some lawyers and people in the business world who earn millions more.
and yet to become a GP if you go through Melb Uni requires 7 years at University ( 3 yrs pre-medical then 4 years medical ) followed by 3 or 4 years of further postgraduate training including working horrible hours in public hospitals, thus it takes 10+ years to become just a junior GP. This justifies a reasonably high income in my view.
If you believe that phone or home technology will take over the role of GPs, then clearly you have little understanding of the complexities involved in trying to diagnose and treat undifferentiated non specific symptoms.